RBC Bearings Executive Insights: Market Gains, Productivity

On Wednesday, RBC Bearings, Inc. (NASDAQ:ROLL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite shared.

Market Gains

Edward Marshall, Jr. – Sidoti & Company, LLC: The industrial business which grew I guess what 25% in the quarter but I was particularly interested in the OEM up 28%. First of all what’s the split of the OEM to aftermarket first? And I guess if you could comment, is share gains that’s driving the 28%, it seems unusually high?

Dr. Michael J. Hartnett – Chairman, President and CEO: The split of OEM to aftermarket well we kind of breakout the industrial distribution of OEM in the call there. So it’s 25% is what we call OEM but probably 60% of that OEM business is going to that OEMs aftermarket. But we really don’t measure or know about it, which market is consuming it. I think the growth is, number one, the markets that we are servicing there on the OEM side are growing certainly in mining, oil and gas are the big growers in that region. I think ground defense probably it can grow as much as the other two. So, a lot of it is just keeping up to the pace of expansion in those industrial markets and also the introduction of several new products that we’ve developed for those markets over the past three or four years.

Edward Marshall, Jr. – Sidoti & Company, LLC: So by several new products, I mean, I can infer then that you are seeing, I mean, I guess I can infer it also by the rate of growth versus the market growth. I mean you are outpacing there is certainly market share gain there and we’ve talked about oil and gas before, but are there other markets that you think that you’re seeing some share gain in?

Dr. Michael J. Hartnett – Chairman, President and CEO: Well, certainly in the mining and construction area, we’re probably picking up share gain just because of the expansion in that market has been difficult for its current suppliers to keep up with as some of those suppliers are in Japan and the tsunami sort of put some of them out of business or made it difficult for them to continue supply. So, I would say I don’t know if that share gain or its expansion for everyone.

Edward Marshall, Jr. – Sidoti & Company, LLC: I mean, so in other words, is somewhat sustainable at the new share levels because I mean, it’s not like there is a reloading, of a whip or something along those lines where and these are structural changes to your business that this is a good base to work off?

Dr. Michael J. Hartnett – Chairman, President and CEO: Yeah, I mean, I don’t think it’s a one-time event. There is no one-time events that we can put our finger on and sort of push the sales. I mean it’s just an expansion of what’s going on in those markets and an acceptance of several new products that we have developed.

Edward Marshall, Jr. – Sidoti & Company, LLC: The CapEx was I guess unusually high for the fourth quarter and I would say double or even triple some of the numbers you’ve put up over the last eight quarters or so. What – was there anything in particular that was in that? I know that you’d talked about, last call about some additional aerospace kind of capacity is that where the money was spent or any highlight you can provide?

Dr. Michael J. Hartnett – Chairman, President and CEO: Yes, there is one building that we acquired and that was accounted for about $1.3 million of it and that’s to service mainly Aerospace. I mean it is really just moving out of one building into a bigger space and the rest is just spread across our 24 manufacturing facilities and a normal CapEx that we normally run at around 3.5% to 4% of sales.

Edward Marshall, Jr. – Sidoti & Company, LLC: Finally, the inventory number in the quarter looks like may be working capital was a bit of a drag here?

Daniel A. Bergeron – VP and CFO: Yes, the inventory for the quarter was $158.8 million, so it was down $3.5 million from December. So, the investment in working capital was in AR and so we just see that all coming out a nice chunk of that, in the first quarter, which will drive the cash number.

Edward Marshall, Jr. – Sidoti & Company, LLC: So the fourth quarter was just more of a timing thing with the cash and nothing else?

Daniel A. Bergeron – VP and CFO: Yes.

Productivity

Peter Lisnic – Robert W Baird: I guess first question if you can maybe talk about productivity and any sort of metrics that you’re willing to disclose this year and then what the potential for productivity improvement might be in the coming fiscal year?

Dr. Michael J. Hartnett – Chairman, President and CEO: Well, I mean it’s a number that we focus on it’s a number that we talk about at many of our operations meetings. It’s the number that year-to-year basis we try to budget and improvement in that ratio we measure total labor, not just direct labor, value-added labor, but total labor divided in to total sales. That’s kind of the focus that we keep, we keep track of and so a price increase would be, on that metric would be the same as more production per man hour. But frankly we don’t care how we get it price increase is fine if we’re going to improve our productivity that way. So we normally manage and expect something around 3% to 6% per year, depending upon the state of the business. If the business has been doing well and is some of those ratios can be as high as 20. We probably are going to plateau a little bit, but if the business is doing is one of our earlier businesses in terms of business development and maybe we acquired it last 36 months and it isn’t quite on the production level that some of the others are we’ll probably budget a stronger expansion there.

Peter Lisnic – Robert W Baird: Okay, all right. That is perfect. And then if you take that productivity improvement and then translate that into some of the gross margin commentary that you had talked about previously, the 100 basis points of improvement for fiscal ’13 is sort of the plan I guess. A, can you maybe give us an update on whether or not that’s still the plan for this coming fiscal year; and then, B, it sounds like if you do get anywhere from that 3% to 6% or maybe that 100 basis points of guidance would again seem to be conservative?

Dr. Michael J. Hartnett – Chairman, President and CEO: Well, I know Dan has been working hard on those kind of (source of) metrics, so I’ll defer to him.

Daniel A. Bergeron – VP and CFO: Well, Pete, as you know, we really exceeded the expectation 2012, but I think internally – our internal target is to get to that 36%, and you know, like always, if we’re able to beat that internal target we’ll be happy about that.

Peter Lisnic – Robert W Baird: Okay, all right. And then, with the business kind of running full steam both in aero and industrial, I’m just wondering if you’re seeing any sort of bottlenecks or extended lead times in product delivery to your customers; any issues on that front?

Dr. Michael J. Hartnett – Chairman, President and CEO: No, I don’t – not in any major way. I mean we’re very cautious about that, and I think if you look at our backlog one of the things that we’ve been able to do is bring up our throughput and maintain our backlog to be reasonably steady, because we try to maintain competitive lead times on a lot of the products that we don’t have under contract, and the products that we do have under contract we manage it in a different way. So…

Edward Marshall, Jr. – Sidoti & Company, LLC: The industrial business which grew I guess what 25% in the quarter but I was particularly interested in the OEM up 28%. First of all what’s the split of the OEM to aftermarket first? And I guess if you could comment, is share gains that’s driving the 28%, it seems unusually high?

Dr. Michael J. Hartnett – Chairman, President and CEO: The split of OEM to aftermarket well we kind of breakout the industrial distribution of OEM in the call there. So it’s 25% is what we call OEM but probably 60% of that OEM business is going to that OEMs aftermarket. But we really don’t measure or know about it, which market is consuming it. I think the growth is, number one, the markets that we are servicing there on the OEM side are growing certainly in mining, oil and gas are the big growers in that region. I think ground defense probably it can grow as much as the other two. So, a lot of it is just keeping up to the pace of expansion in those industrial markets and also the introduction of several new products that we’ve developed for those markets over the past three or four years.

Edward Marshall, Jr. – Sidoti & Company, LLC: So by several new products, I mean, I can infer then that you are seeing, I mean, I guess I can infer it also by the rate of growth versus the market growth. I mean you are outpacing there is certainly market share gain there and we’ve talked about oil and gas before, but are there other markets that you think that you’re seeing some share gain in?

Dr. Michael J. Hartnett – Chairman, President and CEO: Well, certainly in the mining and construction area, we’re probably picking up share gain just because of the expansion in that market has been difficult for its current suppliers to keep up with as some of those suppliers are in Japan and the tsunami sort of put some of them out of business or made it difficult for them to continue supply. So, I would say I don’t know if that share gain or its expansion for everyone.

Edward Marshall, Jr. – Sidoti & Company, LLC: I mean, so in other words, is somewhat sustainable at the new share levels because I mean, it’s not like there is a reloading, of a whip or something along those lines where and these are structural changes to your business that this is a good base to work off?

Dr. Michael J. Hartnett – Chairman, President and CEO: Yeah, I mean, I don’t think it’s a one-time event. There is no one-time events that we can put our finger on and sort of push the sales. I mean it’s just an expansion of what’s going on in those markets and an acceptance of several new products that we have developed.

Edward Marshall, Jr. – Sidoti & Company, LLC: The CapEx was I guess unusually high for the fourth quarter and I would say double or even triple some of the numbers you’ve put up over the last eight quarters or so. What – was there anything in particular that was in that? I know that you’d talked about, last call about some additional aerospace kind of capacity is that where the money was spent or any highlight you can provide?

Dr. Michael J. Hartnett – Chairman, President and CEO: Yes, there is one building that we acquired and that was accounted for about $1.3 million of it and that’s to service mainly Aerospace. I mean it is really just moving out of one building into a bigger space and the rest is just spread across our 24 manufacturing facilities and a normal CapEx that we normally run at around 3.5% to 4% of sales.